Sharp Drops After Saying Material Doubt on Survival

Japan’s largest maker of liquid-crystal displays follows Panasonic Corp. in lowering its earnings outlook as the two companies and Sony Corp. struggle against slumping TV demand, a slowing economy and competition from Samsung Electronics Co. and Apple Inc. Photographer: Tomohiro Ohsumi/Bloomberg

Nov. 2 (Bloomberg) -- Sharp Corp., the world’s worst-performing major stock, fell in Tokyo after forecasting a record
$5.6 billion loss and saying there is “material doubt” about
its ability to survive. The company’s credit was downgraded to
junk by Fitch Ratings.

The shares dropped 2.4 percent to 165 yen, extending this
year’s decline to 75 percent, the worst performer among more
than 1,600 companies in the MSCI World Index of developed
nations. Fitch downgraded Sharp six levels to B- today, citing
growing liquidity risks.

Sharp’s warning came a day after a surprise $9.6 billion
loss forecast by Panasonic Corp., which was downgraded two
levels today by Standard & Poor’s, as the companies lose ground
to Samsung Electronics Co. in TVs. Osaka, Japan-based Sharp has
failed to win a planned 67 billion-yen ($835 million) investment
from Taiwan’s Foxconn Technology Group and has had difficulty
selling commercial paper as it burns through cash.

“Fitch does not foresee any meaningful operational
turnaround in the company’s core business over the short- to
medium-term,” the ratings company said in its statement today.
Fitch kept the company on a negative ratings watch.

The net loss will probably be 450 billion yen in the year
ending March 31, Sharp said in a statement yesterday, scrapping
its earlier projection for a 250 billion-yen loss.

Sharp’s convertible bonds maturing in September 2013 fell
6.85 percent to 50.30 yen per 100 yen face value as of 10:15 a.m.
in Tokyo. That’s the biggest drop since Oct. 18, when the notes
fell to an all-time low of 43.10 yen.

‘Material Doubt’

Sharp’s new loss forecast compares with the 296 billion-yen
loss average of 17 analyst estimates, according to data compiled
by Bloomberg before yesterday’s statement.

“Sharp is in circumstances in which material doubt about
its assumed going concern is found,” the company said in a
statement to the Tokyo Stock Exchange after the market closed
yesterday.

In contrast, Sony Corp. reiterated its forecast for a first
annual profit in five years after slashing costs, exiting panel
ventures and trimming its TV lineup.

S&P downgraded Panasonic’s long-term debt to BBB, the
second-lowest investment grade, from A-, with a stable outlook.
The ratings company cited “huge” losses and a slow recovery
outlook.

Sharp has been hit by falling prices for liquid-crystal-display panels, delays at an LCD factory and declining sales in
Japan and China.

Turnaround Plan

The company’s turnaround plan includes seeking voluntary
retirements, cutting salaries, selling assets and reducing
capital investments, it said. Japan’s largest maker of liquid-crystal displays also is considering several partnerships as
talks with Foxconn continue, President Takashi Okuda said.

“We think time is running out for the company and believe
an earnings rebound hinges on how quickly it can increase
capacity utilization,” Shunsuke Tsuchiya, an analyst at Credit
Suisse Group AG, wrote in a report to clients. “We also see
further risk of capital erosion and a remaining need for fresh
capital.”

Panasonic, Japan’s second-biggest TV maker, said Oct. 31 it
expected a 765 billion-yen full-year net loss, or 30 times
bigger than analysts had estimated, citing restructuring costs
and falling demand for its products. Osaka-based Panasonic said
it won’t pay a dividend for the first time since 1950 because of
an “urgent need” to improve its financial position.

Sharp widened its full-year forecast for operating loss for
LCDs to 132 billion yen from 105 billion yen, saying it took a
53.5 billion-yen writedown on its large LCD inventory and sales
of small LCDs fell below estimates.

Global TV demand is expected to remain little changed in
2013 after shipments of all TV types declined more than 4
percent this year, researcher DisplaySearch said.

Sharp also posted a 61 billion-yen charge on deferred tax
assets and took a 30.1 billion-yen writedown on equipment for
solar-panel production.

Elpida Echoes

The company’s warning echoes that made by chipmaker Elpida
Memory Inc. before it filed for bankruptcy in February.

Elpida lost money for five straight quarters before filing
for bankruptcy with liabilities of 448 billion yen after falling
prices for its computer-memory chips and a stronger yen eroded
earnings and left it unable to pay debt.

Elpida said Feb. 14 it wasn’t making enough progress in
obtaining needed financing, and “therefore, material
uncertainty about its assumed going concern is found.” That
note was added to financial results for the previous quarter.

Sharp, the century-old inventor of mechanical pencils, has
put up properties, including its headquarters, as collateral to
raise funds. Sharp turned to its main banks Mizuho Financial
Group Inc. and Mitsubishi UFJ Financial Group Inc. as it
struggled to refinance debt after Standard & Poor’s and Moody’s
Investors Service cut its credit ratings to junk.

The banks contributed to a total of about 360 billion yen
in loans by the end of September, Sharp said.

The electronics maker has been renegotiating terms for a
proposed stake sale to Taipei-based Foxconn after widening its
full-year loss forecast eightfold in August, triggering a slide
in its share price. Foxconn agreed in March to invest 67 billion
yen for a 9.9 percent stake in Sharp at 550 yen a share.

Sharp assumes a deal can be reached, Okuda said.

Sharp sold a stake in an LCD factory in central Japan to
Foxconn founder Terry Gou earlier this year to jointly run the
facility, considered the most advanced in the industry.